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Press release from Marketwire

Strongco Reports Solid Revenue Growth and Market Share Gains from Improved Sales Performance in the Third Quarter

Wednesday, October 30, 2013

Strongco Reports Solid Revenue Growth and Market Share Gains from Improved Sales Performance in the Third Quarter

17:57 EDT Wednesday, October 30, 2013

MISSISSAUGA, ONTARIO--(Marketwired - Oct. 30, 2013) - Strongco Corporation (TSX:SQP) today reported financial results for the three months ended September 30, 2013.

Summary*

  • Total revenues increased by 10.5% to $131.7 million
  • Gross margin of $24.2 million compared to $22.5 million
  • Operating income of $5.7 million compared to $5.6 million
  • EBITDA of $13.8 million compared to $15.1 million
  • Net income of $2.0 million compared to $2.4 million
  • Earnings per share of $0.15 compared to $0.18 per share

* Comparisons are between third quarter 2013 and third quarter 2012

"In the third quarter, Strongco extended its record of solid revenue growth through market share gains in construction equipment despite declines in several of our key markets as well as strong growth in crane sales. Our improved sales performance is a result of the recent upgrades made to the branch infrastructure and to our enhanced sales organization," said Robert Dryburgh, President and Chief Executive Officer. "Overall, demand in heavy equipment markets has been adversely affected by substantially less demand in Quebec, the Atlantic provinces and New England. Despite this market softness, we believe the Company will continue to benefit from the organizational investments we have made to realize higher revenues and market share gains across the country.

"Looking ahead to the fourth quarter, Strongco's sales backlogs and level of rental contracts with purchase options (RPOs) are strong, which suggests a continuing demand for heavy equipment. Thus, we remain cautiously optimistic for the balance of the year.

"We also remain keenly focused on reducing floor plan debt through inventory reductions. In the third quarter, equipment notes declined by $8 million as equipment inventory decreased by approximately $8 million from the second quarter and is running $10 million lower than at the same time last year. Inventory committed to RPOs did increase slightly with the delay of some conversions into the fourth quarter. With our anticipated level of sales combined with the RPO conversions expected in the fourth quarter, we look forward to a substantial reduction in inventory by the end of the year," he continued.

Financial Highlights

Three-Month Periods Ended September 30 (unless otherwise noted)

($ millions except per share amounts) 2013 2012
Revenues $ 131.7 $ 119.2
Operating income $ 5.7 $ 5.6
EBITDA $ 13.8 $ 15.1
Earnings before income taxes $ 2.9 $ 3.4
Provision for income taxes $ 0.9 $ 1.0
Net income $ 2.0 $ 2.4
Basic and diluted net income per share $ 0.15 $ 0.18
Equipment in inventory $ 253.6 $ 263.1
Equipment notes payable $ 225.1 $ 233.8

Third Quarter 2013 Review

Total revenues in the three months ended September 30, 2013 were $131.7 million, up 10.5% from the third quarter of 2012. Equipment sales increased by 16% from last year to $87.8 million; rental revenues were $8.5 million, down 19% from $10.5 million; and product support revenues totalled $35.4 million, up 8% from $32.7 million from the same period in the prior year.

Gross margin increased by $1.7 million to $24.2 million during the third quarter of 2013. As a percentage of revenue, the overall gross margin was 18.3%, down slightly from 18.9% last year due primarily to a lower margin percentage on equipment sales and a slightly higher proportion of equipment sales.

Administrative, distribution and selling expenses in the third quarter of 2013 were $19.8 million, or 15.0% of revenue, compared to $17.1 million, or 14.3% of revenue in 2012. Expenses in the quarter were up year over year due in large part to an adjustment made in the third quarter of 2012 to reduce the accrual for management incentives. Before that adjustment, expenses in the third quarter of 2012 were $18.1 million or 15.2% of revenue. Expenses in the third quarter of 2013 were also higher than the prior year due to the investments made in 2012 in new branches in Edmonton, Baie-Comeau and Trois-Rivières, and additional staffing and training costs in 2013 to support growth, improve customer service and prepare for the opening of the Fort McMurray branch in January.

Operating income, before interest and taxes, increased to $5.7 million, or 4.4% of revenue, from $5.6 million, or 4.7% of revenue, in the third quarter of 2012. Included in operating income in the quarter was a gain of $1.5 million on the sale and leaseback of the Company's branch in Acheson, Alberta.

EBITDA for the third quarter decreased slightly to $13.8 million (10.5% of revenue), down from $15.1 million (12.7% of revenue) a year earlier.

Strongco's net income in the third quarter of 2013 was $2.0 million ($0.15 per share), compared to $2.4 million ($0.18 per share) in the third quarter of 2012.

Outlook

"Heavy equipment markets slowed in 2013. Overall demand for equipment remains flat to slightly down from last year for Canada overall with Quebec and the Atlantic Provinces down substantially," said Mr. Dryburgh. "Economic forecasts continue to project modest growth in Canada overall in 2013 and construction activity is expected to stay flat for the balance of the year except in Quebec.

"Going forward, Strongco continues to make further strategic investments in its branch network to heighten visibility in our markets, better serve customers and drive regional business growth. As part of this initiative for northern Alberta, our new Fort McMurray branch, which is currently under construction, will open for business in the first quarter of 2014," he added.

In Alberta, the increased use of rail cars to transport Alberta's unconventional crude to refineries on the U.S. Gulf Coast and the West Coast has partially relieved pipeline bottlenecks. This, together with other recent developments, resulted in a price rebound for Alberta-produced oil and lifted some of the uncertainty in the province. Activity in the oil sands has resumed but at a more controlled pace and the outlook for the fourth quarter and long-term outlook for Alberta is positive. In this environment, overall demand for heavy equipment in Alberta in the first nine months of the year was essentially flat to slightly down in general purpose equipment (GPE) and road equipment with a slight uptick in compact equipment. This trend will continue in the fourth quarter.

Construction markets in Ontario are continuing to recover slowly following the recession, but a general lack of optimism and uncertainty over the economy still exists. While pockets of construction activity are expected to continue in certain areas and around large projects (e.g. mining and forestry in northern Ontario and the Pan-Am games), construction markets in Ontario are generally expected to remain to be flat to slightly down in the near term.

Construction activity in Quebec declined significantly in 2013 and demand for heavy equipment in the region was substantially lower in the first nine months of the year and is expected to remain depressed over the balance of the year. While there is growing political pressure to resume spending to repair and replace the seriously deteriorating infrastructure in the province, markets are expected to remain weak for the balance of the year, which will continue to negatively impact Strongco revenues.

While the small up-tick in residential housing markets and the increased level of new job creation were positive signs of economic recovery in the United States, the improvement has been less noticeable in New England and has not translated into any significant upturn in construction markets in the area. Heavy equipment markets in the region remain depressed. There remains an oversupply of equipment in the region, which has added to an already competitive environment. Economists are still projecting modest economic growth in the United States overall in 2013, but the recovery will be very regional and more pronounced in the latter part of the year. No meaningful recovery is expected in New England in 2013, which will continue to dampen heavy equipment markets and hamper Strongco's sales in the region.

With the anticipated level of sales in the fourth quarter and Strongco's sales backlogs and level of rental contracts with purchase options ("RPOs") management remains cautiously optimistic for the balance of the year.

Conference Call Details

Strongco will hold a conference call on Thursday, October 31, 2013 at 10:00 am ET to discuss third quarter results. Analysts and investors can participate by dialing 1-800-319-4610 or +1-604-638-9010 outside Canada and the USA. An archived audio recording will be available until midnight on November 22, 2013. To access it, dial 1-800-319-6413 or +1-604-638-9010 and enter passcode 4689#.

About Strongco Corporation

Strongco Corporation is a major multiline mobile equipment dealer with operations across Canada and in the United States. Strongco sells, rents and services equipment used in sectors such as construction, infrastructure, mining, oil and gas, utilities, municipalities, waste management and forestry. The Company has approximately 690 employees serving customers from 27 branches in Canada and five in the United States, operating under Chadwick-BaRoss. Strongco represents leading equipment manufacturers with globally recognized brands, including Volvo Construction Equipment, Case Construction, The Manitowoc Company, National, Grove, Terex Cedarapids, Terex Finlay, Ponsse, Fassi, Allied Construction, Taylor, ESCO, Dressta, Sennebogen, Jekko, Takeuchi, Link-Belt and Kawasaki. Strongco is listed on the Toronto Stock Exchange under the symbol SQP.

Forward-Looking Statements

This news release contains "forward-looking" statements within the meaning of applicable securities legislation which involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Strongco or industry results, to be materially different from any future results, events, expectations, performance or achievements expressed or implied by such forward-looking statements. All such forward-looking statements are made pursuant to the "safe harbour" provisions of applicable Canadian securities legislation. Forward-looking statements typically contain words or phrases such as "may", "outlook", "objective", "intend", "estimate", "anticipate", "should", "could", "would", "will", "expect", "believe", "plan" and other similar terminology suggesting future outcomes or events. This news release contains forward-looking statements relating to the expected trading of common shares of Strongco on the TSX, and such statements are based upon the expectations of management.

FOR FURTHER INFORMATION PLEASE CONTACT:

Contact Information:
Strongco Corporation
J. David Wood
Vice-President and Chief Financial Officer
905.565.3808
jdwood@strongco.com
www.strongco.com

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